Jawbone IPO: Jawbone Gets A Lifeline From BlackRock

  • Wearables veteran Jawbone missed the growth train of the category it helped to form.
  • Fitbit outperformed Jawbone in the fitness trackers market, and the company does not have the product for the entry-level segments of the smartwatch market.
  • BlackRock's $300M milestone-based debt financing might be Jawbone's lifeline. A successful turnaround may lead to the Jawbone IPO from here.

Wearables is one of the hottest trends these days in the consumer electronics market fueled by Fitbit's (NYSE:FIT) success, the Apple (NASDAQ:AAPL) Watch buzz, and Alphabet's (NASDAQ:GOOG) smart headset, Glass. The rise of wearable devices drove the popularity of Fitbit and Pebble solutions and allows many tech companies to appear innovative while talking about a new wearable product. However, one of the veterans of the wearables market – Jawbone – has been around since the late 1990's, and it is still a small, privately-held startup that raises new funding rounds from time to time.

Note: You might also be interest in our IPO coverage.

Jawbone was founded in 1999 in San Francisco by two Stanford alumni to develop noise cancelling technology and advanced communication technology for soldiers in combat. Jawbone's founders understood the commercial potential of their development and started marketing a Bluetooth headset combining both technologies mentioned above. Today, beyond Bluetooth headsets, Jawbone also offers portable audio devices and fitness trackers.

As mentioned above, Jawbone has been around for quite a long time now, specializing in wearables even before they had that name. However, almost everyone involved in the wearables market or anyone who even owns a wearable device noticed that Jawbone, once a leader of a category it invented, has today fallen behind the competition. Jawbone offers an obsolete fitness tracker without an embedded screen like Fitbit, Pebble, or other similar products.

Jawbone_chart 1_112415

Source: Jawbone.com

Even though their fitness trackers seem out of date, Jawbone is probably doing something right since the company is still up and running more than fifteen years after its inception. Last year, TechCrunch reported that Jawbone generates around $600M of revenues a year mainly from its popular Jambox product line and also from its wearable products. Jawbone's valuation in its latest equity funding round was at $3.3B, which reflected a 5.5 P/S ratio, which is slightly above Fitbit's 3.7 ratio. Even though it might seem attractive, this P/S ratio heavily relies on portable audio sales. As exciting as the portable audio business might be, Jawbone’s growth driver is the fitness tracker and adjacent smartwatch solution.

Currently, according to different estimations, Fitbit controls between 60% and 70% of the fitness tracker market, and the rest is divided between Jawbone, Nike (NYSE:NKE), Garmin (NASDAQ:GRMN), and others. Jawbone is the second largest player in the market with 15% to 20% of the market. The increased competition and cannibalization risk from the smart watch market make Jawbone's fitness tracker market share very fragile.

Assuming Fitbit will continue the trend of adding smartwatch features into its fitness trackers, it’s safe to estimate that Fitbit will offer a high-end product in the smartwatch market and a low-end product in the fitness trackers market. However, at least for now, Fitbit smartwatch products fit into the lower segments of the smartwatch market; thus not only does Fitbit dominate the fitness tracker market, it has also started gaining market share in the low-end smartwatch segment. To truly compete with Fitbit, Jawbone needs to first focus on improving its fitness tracker product to gain more market share and, at the same time, start developing a high-end product for the smartwatch entry level segments.

Jawbone's recent business headwinds might explain the latest $300M debt deal it signed with BlackRock (NYSE:BLK), the asset management giant. In the agreement, BlackRock gives Jawbone a $300M credit attached to a milestone roadmap that will trigger funds released to Jawbone in case the company delivers successful results. In the agreement, BlackRock receives a senior secured lender status that provides the giant with financial priority over other lenders and preferred investors in case of a bankruptcy or sale.

Even though the BlackRock deal might seem like a huge burden on Jawbone that could accelerate its drop, I believe it's Jawbone’s opportunity to use BlackRock’s credit and business guidance to develop new products that will be competitive compared to Fitbit and help Jawbone gain more market share in the fitness trackers market, and successfully penetrate the smartwatch market. In case the turnaround is successful, we might see Jawbone going public in 2016 or 2017, trying to leverage its growth and use its vast experience in raising funds from institutional investors as it did in the last 16 years since inception. In this scenario, once Jawbone's turnaround is successful and it fulfills its potential to becomes a significant player in the wearable market, investors should keep Jawbone IPO on their radar.

However, In the case that Jawbone does not succeed to turn the ship around, I believe that BlackRock will seek to sell the company to a third party interested in its brand, IPs, and product line, who is interested in penetrating the wearables market.

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